Will commission survive the FCA’s pure protection review?

Recently, the FCA published the terms of reference for its review of the pure protection market, following consultation on the review’s scope and approach.  While many of those who are tired of being ‘bundled in’ with general insurance welcome this market study, the elephant in the room is commission – or, to be more specific, commission bias.

For years, consumer groups have cited commission bias as a major cause of consumer harm. The industry’s position is that because life insurance is not that stimulating to purchase, without commission, sales will drop and the proportion of protection provided will plummet – which is not good for the nation’s financial resilience.  Fundamentally, both arguments are true. 

The challenge for the industry is how it can reduce bad outcomes which result from commission bias, and evidence this – so it does not get strangled by a blunt regulation. The industry needs to demonstrate that commission bias is just a minimal cause of bad outcomes.

Consumer Duty gives the financial services industry the framework needed to measure and report on bad outcomes for all consumer types. Ideally, firms would demonstrate the effects of commission on consumer outcomes, across different distribution models – although, as most firms have a single remuneration model, this may not be possible.

Recent attention has been on claims and claims turnaround times and, as claims is where the value of protection insurance is received and demonstrated, it deservedly gets this attention.

20 years ago, MorganAsh introduced tele-interviewing to the UK. The key benefits of this were to separate the medical assessment from the sales process and to be more diligent in collecting medical information. Now, the amount of misrepresentation we see that results in paid-out claims is effectively zero (we do get some fraud by consumers, but this is quickly and easily debunked at the time of claim).

The industry chose a different route, pursuing automated systems and requiring the salesperson to undertake medical assessments – all in the pursuit of sales, which were prioritised over reducing misrepresentation and any resultant problems at claim stage.

Statistics on declined claims due to misrepresentation have improved over the years – but this is due to cases being paid out rather than up-front identification. Reinsurers report misrepresentation in around 10–20% of cases – and they maintain that the industry could reduce its fees if misrepresentation was reduced.

Under Consumer Duty, it is difficult to justify consumers paying a premium resulting from an industry focusing on sales rather than consumer outcomes. There is a difficult fair-value argument, which says that consumers pay more because the industry is focused on sales – and indeed, this is exactly what Consumer Duty is trying to change.

We know consumers believe that pay-out rates from protection insurance are far lower than they are in practice and, despite good PR and marketing efforts, this has hardly changed over the last 20 years. The industry’s focus is on sales, not consumer outcomes, – and it only needs a few bad stories (justified or not) to reinforce the consumers’ view. After all, bashing the insurance industry drives both views and clicks.

Consumer Duty’s main thrust is for firms to focus on good consumer outcomes or, at the least, reducing bad outcomes, as this will improve consumers’ trust over the long term. Improving trust over the long term should improve consumer take-up and sales, so it is in both the consumers’ and the industry’s interest.

When remunerating by commission to an individual, and requiring them to undertake the medical assessment, it is difficult to even suggest that bias does not exist. In addition, undertaking medical assessments and selling/advising on products typically requires radically different skill-sets, and is generally an inefficient use of advisers’ time.

Using techniques like tele-interviewing to separate sales and medical assessments not only removes bias, but provides the evidence of having removed bias. It seems to me carrying on denying that there is an issue with commission bias, without any evidence to demonstrate this, is not going to wash. Firms need to prove to the regulator that there is no commission bias – and demonstrate the removal of bias to win back consumers’ trust.